Archive for the ‘Prizes’ Category

One real possiblility is that someone outside of the US invents this (perhaps quicker because they have to race with US based researchers who get a prize kick). In that case, the US can send whomever does it a thank you card. They have put competitive pressure on them and haven’t spent a cent!

There’s a fair amount of skepticism in the econoblogosphere about McCain’s proposed $300 million prize for an auto battery. Tim Haab wonders:

But, why does the government have to provide the incentive? Shouldn’t markets do that? What am I missing?

Well, one potential reason, and something we’ve mentioned here before, is that much economicresearch finds that the existence of knowledge spillovers means that the socially optimal level of R&D investment is (conservatively) two to four times the level of actual investment. In other words, we as society get more than we pay for when we fund R&D.

Other commenters argue that the prize is unnecessary on more practical grounds. Tom Lee says:

But if someone were to invent a better [battery] they’d already be poised to make a huge amount of money through its commercialization. Offering prizes for innovation isn’t always a terrible idea — for pharmaceuticals with a limited market of potential users it can make sense due to the huge costs associated with developing and testing a new drug. But everyone in the developed world needs better energy storage technology, and they need it right now. … So sweetening the pot is unnecessary. Anyone who has a good idea about how to build a better battery is already working on the problem.

I’ll admit this argument sounds pretty convincing. Given the price of oil there’s a strong existing incentive to develop better batteries. Still, the possibility of knowledge spillovers lurks in the background…

Which brings us to a comment from a Free Exchange blogger, who argues that the structure of a prize doesn’t fit the problem:

The question is, will the prize induce an increase in research activity? Where batteries are concerned, this seems highly unlikely. Prizes are better suited to areas where there is not yet a clear market application for a discovery…

I can think of one arena where better energy storage could be put to very good use, and yet simultaneously lacks a clear market signal: electricity. The grid is still essentially a regulated environment. Energy storage would greatly increase the attractiveness of many renewable generation technologies which are inherently intermittent, but the “market” for such an innovation is a fragmented patchwork of regulatory agencies.

I suspect that energy storage for the grid might be a socially desirable spillover from McCain’s auto battery prize. This means that his proposal is less bad than many seem to think — but also less good than either a direct prize for grid-based energy storage, or a reform of our transmission policies.

Today on Slate, Joel Waldfogel writes about an interesting job market paper from Jeniffer Brown of Berkeley’s Ag Econ department. Brown examines the effectiveness of incentives in the presence of wide, obvious gaps in skill level/ competence. Waldfogel begins by laying out the conventional business reverence towards incentives, quoting Alec Baldwin in Glengarry Glen Ross, who famously said, “As you all know, first prize is a Cadillac Eldorado. … Second prize is a set of steak knives. Third prize is you’re fired.” Jack Welch wisdom tells us that such schemes are effective because they provide incentives to perform. However, Brown’s research highlights the somewhat obvious fact that what matters to participants in any competition is not just the size of the prize, but the the expected value of the prize, adjusted for the probability of winning. Using data from the PGA, Brown found that mid to lower range players played demonstrably worse when Tiger Woods was in the field. Depending on your goals as a social planner/ competition organizer, Brown’s paper suggests that GE style incentives schemes may actually undermine rather than encourage performance. One the one hand, PGA’s multi-million dollar prizes appear to be working. Tiger Woods is the best golfer ever. But if you’re concerned about average or median player performance, such a prize scheme may actually not be such a good idea when there is a wide, discernible heterogeneity in skill level/ competence.

Ok I know that didn’t really have much at all to do with the type of prize we typically talk about on CT, but I thought it was an interesting paper nonetheless.

The NYTimes reports that the first round of the Netflix prize did not result in the $1 million reward being given out. The goal was to improve Netflix’s matching algorithm by 10%. 27,000 contestants from 161 countries competed, but, tellingly, the top teams were all affiliated with large, well funded institutions.

Was the prize/competition format optimal for this task?

The closest team, AT&T, spent over 2,000 hours on the project. With only $1 million at stake and a large number of entrants, this doesn’t appear to have been a profit maximizing endeavor by AT&T.

Today’s New York Times has an article about one of CT’s recurring topics, innovation prizes. Apparently the series of challenges has produced results more quickly than expected:

The purpose of the Darpa races has been to help build robot vehicles for the United States military by the middle of the next decade. Progress, however, has been so dramatic that the impact is likely to be felt soon and far more broadly, in the commercial automotive world and elsewhere.

I think the article illustrates the importance of harnessing research universities — with their mixture of academic experts, young fresh thinkers, and some healthy competitive rivalry — for the innovation process:

Not surprisingly, perhaps, robot personality quirks can mirror the individual styles of their human designers. And in this third annual race, sponsored by the Pentagon and now called the Darpa Urban Challenge, the leading machines also reflected a very human rivalry between two leading computer science and engineering schools.

From the West Coast, the Stanford Racing Team was led by Sebastian Thrun and Michael Montemerlo. Mr. Thrun heads the Stanford Artificial Intelligence Laboratory, and Mr. Montemerlo is a senior researcher at the lab. Before coming to Stanford, both scientists were robotics researchers at Carnegie Mellon University, where they worked with William L. Whittaker, a legendary roboticist known as Red. Mr. Thrun and Mr. Whittaker were Mr. Montemerlo’s thesis advisers.

From the East, Mr. Whittaker was one of the first people to propose vehicle races as a way to advance robotics. He has designed robots for tasks like clearing mines and exploring Mars.

Ok so this post has almost nothing to do with environmental economics, but it’s related to prizes (which I’ve talked about here before). Feel free to ignore this if prizes don’t interest you or if you’re a hater (ie Yankees fan).

In my rundown of the the Democratic contenders’ environmental platforms last week I mentioned that I’d have a follow up post on Barack Obama’s idea about using cash prizes to promote energy innovation. This is something I’ve been interested in for a few years now, although mainly in the context of pharmaceutical innovation. Recently, however, I’ve become increasingly convinced that energy markets in the face of global climate change present just the type of problem that prizes might be good at solving.